Monday, December 28, 2009

Burlington Northern warned of a weak economy and tepid recovery ahead of its merger with Berkshire Hathaway. Wall Street, take note.

A PESSIMISTIC BUSINESS FORECAST BY THE management of Burlington Northern Santa Fe as the railroad considered Berkshire Hathaway's merger proposal in late October may mean U.S. industrial activity will be less robust in 2010 than many on Wall Street anticipate.

Railroads, which transport more than 40% of the country's freight, are an excellent gauge of economic activity. If Burlington's (ticker: BNI) outlook proves accurate, the nation's other major railroads -- CSX (CSX), Norfolk Southern (NSC) and Union Pacific (UNP) -- also could see subpar results. Shares of all three have rallied since Burlington's Nov. 3 announcement of its acceptance of Berkshire's (BRKA) $34 billion proposal.

After Berkshire CEO Warren Buffett made what proved to be a successful $100-a-share bid to Burlington CEO Matthew Rose, Burlington management sent the railroad's board four potential financial scenarios to consider as it weighed Buffett's proposal. The most optimistic -- that Burlington could earn $5.06 a share if the economy and the company's business recover in 2010 -- was at odds with Wall Street's far more upbeat 2010 consensus earnings estimate of $5.50 a share, according to the preliminary proxy for the merger.

Management thought it more likely the economy wouldn't start to recover until 2011 and that the railroad would earn a depressed $4.40 a share in 2010. The other two scenarios were even more bearish: Either there would be no recovery and unit growth would be flat for five years, or the economy would enter a "deeper recession."

These forecasts suggest Berkshire overpaid for Burlington. Wall Street thinks Buffett paid a full but not excessive price, especially as 40% of the deal price will be paid in Berkshire shares....MORE